Externalities, Incentives, and Economic Reforms

44 Pages Posted: 23 Apr 2004 Last revised: 13 Oct 2022

See all articles by Joshua Aizenman

Joshua Aizenman

University of Southern California - Department of Economics

Peter Isard

International Monetary Fund (IMF) - Research Department

Multiple version iconThere are 2 versions of this paper

Date Written: June 1990

Abstract

The paper emphasizes the role of institutions and incentives in the presence of externalities. An economy with multiple public decision makers is likely to experience "overspending," "undertaxing," "overborrowing," and "overinflation" unless effective institutions exist for overcoming coordination failure. External financing may weaken incentives for adjustment over the longer run unless assistance is made conditional on fundamental institutional reforms. The paper also analyses reforms that strengthen incentives to provide effort. Uncertainty regarding future taxes reduces present effort and the responsiveness of output to market signals. In addition, the paper addresses the adverse effects of bank insurance and soft budget constraints.

Suggested Citation

Aizenman, Joshua and Isard, Peter, Externalities, Incentives, and Economic Reforms (June 1990). NBER Working Paper No. w3395, Available at SSRN: https://ssrn.com/abstract=297330

Joshua Aizenman (Contact Author)

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall 300
Los Angeles, CA 90089
United States

Peter Isard

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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